Smart Money

Pigs at the trough
November 10th, 2008

It’s almost too much to digest at once, the new revelations over how various aspects of the sundry bailouts came about. The information is too much, the outrage is too much. But let’s try.

First comes word that Hank Paulson rewrote tax law without Congress’s say-so, giving the banks a $140 billion tax windfall. Now one could argue the tax law Paulson circumvented was a dumb idea, but even mainstream analysts who don’t fuss over the plain language of the Constitution say Treasury overstepped its bounds here. I hope conservatives who hailed the “unitary executive” philosophy of Team Bush might be rethinking things by now… but I doubt it.

Meanwhile, Paulson and Ben Bernanke have gone back on their promise to disclose just who’s benefiting from all the Fed’s emergency loans. $2 trillion, no transparency. To its credit, Bloomberg News has filed a lawsuit under the Freedom of Information Act to bring this out into the open. (What if the Fed pleads it doesn’t have to comply because it’s not a government entity? No, I don’t really want to go there on a Monday morning…)

While the Bloomberg folks are at it, they might want to get their hands on Hank Paulson’s phone records. Over the weekend, one of the Seattle papers reported this: Two months before Washington Mutual collapsed, Paulson told WaMu’s CEO he ought to sell out to JPMorgan Chase because his company was in such poor shape.

So Big Hank knew bad things were going down. It’s enough to make me rethink the notion that Paulson and Bernanke were just making it all up as they went along. Maybe in fact the bailout bill was sitting on the shelf, waiting for the right moment to be rammed through Congress, just like the Patriot Act.

And to add insult to injury, AIG just got a do-over on its bailout. Neat trick. How many of us can consolidate two loans we took out barely two months before? And up the amount of the loan by 22 percent?

Had enough for one morning? Yeah, me too. Meanwhile the media will be fixated today on the face-to-face between the incoming president and the outgoing one, and what kind of body language the incoming and outgoing first ladies will demonstrate.

Can I just crawl into a hole for the next 15 years or so?

Desidooru Saloon

THE SUBPRIME TRUMP CARD:  STANDING UP TO THE BANKS

by Ellen Brown, June 26th, 2008

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

– Thomas Jefferson, Letter to Treasury Secretary Albert Gallatin (1802)

Jefferson had it right. More than 1.5 million homeowners are expected to enter foreclosure this year, and about half of them are expected to have their homes repossessed. If the dire consequences Jefferson warned of 200 years ago have been slow in coming, it is because they have been concealed by what Jerome a Paris calls the Anglo Disease – “the highly unequal economy whereby the rich and the financial sector . . . capture most of the income but hide it by providing cheap debt to the middle classes so that they can continue to spend.” He calls “finance” the “cannibalistic” sector in today’s economy. Writing in The European Tribune this month, he states:

“[O]ne of the more attractive features of the financial world, for its promoters, is its ability to concentrate huge fortunes in a small number of hands, and promote this as a good thing (these people are said to be creating wealth, rather than capturing it). . . . [O]f course, the reality is that such wealth concentration is created by squeezing the rest, as is obvious in the stagnation of incomes for most in the middle and lower rungs of society. This is not so much wealth creation as wealth redistribution, from the many to the few. But what has made this unequality . . . tolerable is that the financial world itself was able to provide a convenient smokescreen, in the form of cheap debt, provided in abundance to all. The wealthy used it to grab real assets in funny money, and the rest were kindly allowed to keep on spending by tapping their future income rather than their insufficient current one; in a nutshell, the debt bubble hid the class warfare waged by the rich against everybody else.”1

Now the debt bubble is bursting, with the anticipated real estate crash, banking crisis, foreclosures, and inevitable recession. “The income capture mechanisms set up during the bubble have not been reversed, so the pain is falling disproportionately on the poorest,” writes Jerome a Paris. Meanwhile, finance is being bailed out. What’s to be done? “[T]he financiers . . . will say that more ‘reform’ and ‘deregulation’ and tax cuts are needed,” he says, but “maybe it’s time to stop listening to what is highly self-interested drivel, and take back what they grabbed: it’s not theirs.”

Good idea, but how? The financiers own the media, and their massively funded lobbies control Congress. How can we the people get enough clout to take on the giant financial and corporate giants? What can we do that will make politicians sit up and take notice?

How about swarming the courts? New case law indicates that a majority of the 750,000 homeowners expected to lose their homes this year could have a valid defense to foreclosure. As much as $2 trillion in real estate may be vulnerable to this defense, providing a very big stick for a lobby of motivated debtors. Mobilizing that group, in turn, could light a fire under the investors in mortgage-backed securities — the pension funds, money market funds and insurance companies holding these “orphan” mortgages. These investors also wield a very big stick, in the form of major law firms on retainer. When the embattled banks demand a bailout because they are “too big to fail,” the taxpayers can respond, “You have already failed. It is time to try something new.”

The Legal Trump Card: Make Them Produce the Note

A basic principle of contract law is that a plaintiff suing on a written contract must produce the signed contract proving he is entitled to relief. If there is no signed mortgage note or recorded assignment, foreclosure is barred. The defendant must normally raise this defense, and most defaulting homeowners, unaware of legal procedure and concerned about the expense of hiring an attorney, just let their homes go uncontested. But when the plaintiffs bringing subprime foreclosure actions have been challenged, in most cases they haven’t been able to produce the notes.

Why not? It appears to be more than just sloppy paperwork. The banks that originally entered into these risky subprime arrangements generally did so because they had no intention of holding the loans on their books. The mortgages were immediately sliced and diced, bundled up as mortgage-backed securities (MBS), and sold off to investors. Loan originators sold the mortgages to financial institutions or other banks, which then sold the rights to the monthly mortgage payment income to investors, while transferring the responsibility to collect these payments to specialized mortgage servicing companies. The result has been to slice up the mortgage contract, with no party really having ownership of the original paperwork. When foreclosure has been initiated, the servicer or trustee acting as plaintiff now has trouble proving that it originated the mortgage or owned the loan. In order for a second bank or financial institution to have standing to bring a foreclosure lawsuit in court, it must have been assigned the mortgage; and with the collapse of the housing market, many of the subprime lenders have gone out of business, making it impossible to contact the originating mortgage company. Other paperwork has just been lost in the shuffle.2

Why weren’t the mortgage notes assigned to the MBS holders when they were first sold? Apparently because the investors aren’t even matched up with specific properties until after default. Here is how the MBS scheme works: when the mortgages are first bundled by the banks, all of the subprime mortgages go into the same pool. The bundled mortgages are chopped into “securities” that are sold to many investors — banks, hedge funds, money market funds, pension funds — with different “tranches” or levels of risk. The first mortgages to default are then assigned to the high-risk “BBB-” tranche of investors. As defaults increase, later defaulting mortgages are assigned down the chain of risk to the supposedly more secure tranches.3 That means the investors get the mortgages only after the defendants breached the agreement to pay. It also means the investors weren’t a party to the agreement when it was breached, making it hard to prove they were injured by the breach.

The investors have another problem: the delay in assigning particular mortgages to particular investors means there was no “true sale” of the security (the home) at the time of securitization. A true sale of the collateral is a legal requirement for forming a valid security (a secured interest in the property as opposed to simply a debt obligation backed by collateral). As a result, the investors may have trouble proving they have any interest in the property, secured or unsecured.4

The Dog-Ate-My-Note Defense

When the securitizing banks acting as trustees for the investors are unable to present written proof of ownership at a time that would entitle them to foreclose, they typically file what’s called a lost-note affidavit. April Charney is a Florida legal aid attorney well versed in these issues, having gotten foreclosure proceedings dismissed or postponed for 300 clients in the past year. In a February 2008 Bloomberg article, she was quoted as saying that about 80 percent of these cases involved lost-note affidavits. “Lost-note affidavits are pattern and practice in the industry,” she said. “They are not exceptions. They are the rule.”5

In the past, judges have let these foreclosures proceed; but in October 2007, an intrepid federal judge in Cleveland put a halt to the practice. U.S. District Court Judge Christopher Boyko ruled that Deutsche Bank had not filed the proper paperwork to establish its right to foreclose on fourteen homes it was suing to repossess.6 That started the ball rolling, and by February 2008, judges in at least five states had followed suit. In Los Angeles in January, U.S. Bankruptcy Judge Samuel L. Bufford issued a notice warning plaintiffs in foreclosure cases to bring the mortgage notes to court and not submit copies. In Ohio, where foreclosures were up by a reported 88 percent in 2007, Attorney General Marc Dann was reported to be challenging ownership of mortgage notes in forty foreclosure cases.7

Few defendants, however, are lucky enough to have advocates like Charney and Dann in their corner, and most defaulting debtors just let their homes go. A simple challenge can be filed to the complaint even without an attorney, and some subprime borrowers have successfully defended their own foreclosure actions; but retaining an attorney is strongly recommended. People representing themselves are often not taken seriously, and they are likely to miss local rule requirements. With that warning, here is some general information on challenging standing to foreclose:

Some states are judicial foreclosure states and some are non-judicial foreclosure states. In a judicial foreclosure state (meaning the matter is heard before a judge), if a promissory note or recorded assignment naming the plaintiff is not attached to the complaint, the defendant can file a response stating the plaintiff has failed to state a claim. This can be followed with a motion called a demurrer to the complaint. Different forms of demurrers can be found in legal form books in most law libraries. In essence the demurrer states that even if everything in the complaint were true, the complaint would lack substance because it fails to set out a copy of the note, and it should therefore be dismissed. Ordinarily there is no need to cite much in the way of statutes or case law other than the authority reciting the necessity of showing the note proving the plaintiff is entitled to relief.

In a non-judicial foreclosure state such as California, foreclosure is done by a trustee without a court hearing, so the procedure is a bit trickier; but standing to foreclose can still be challenged. If the homeowner has filed for bankruptcy, the proceedings are automatically stayed, requiring the lender to bring a motion for relief from stay before going forward. The debtor can then challenge the lender’s right to the security (the house) by demanding proof of a legal or equitable interest in it.8 A homeowner facing foreclosure can also get the matter before a court without filing for bankruptcy by filing a complaint and preliminary injunction staying the proceedings pending proof of standing to foreclose. A judge would then have to rule on the merits. A complaint for declaratory relief might also be brought against the trustee, seeking to have its rights declared invalid.9

An Equitable Settlement for Everyone

These defenses can help people who are about to lose their homes, but there is another class of victims in the sub-prime mortgage crisis: investors in MBS, including the pension funds and 401Ks on which many people depend for their retirement. If the trustees representing the investors cannot foreclose, the lucky debtors may be able to stay in their homes without paying. However, the hapless investors will be left holding the bag. If the investors manage to shift liability back to the banks, on the other hand, the banks could go down and take the economy with them. How can these tricky issues be resolved in a way that is equitable for all? That question will be addressed in a followup article. Stay tuned.

Ellen Brown, J.D., developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves and how we the people can get it back. Her websites are webofdebt.com and ellenbrown.com.

Here’s some thoughts I’ve found from others about the proposed bail out of banks.

From Matt Furey:

As you’re probably aware of by now, today is the day that Senator John McCain is back on Capitol HIll – presumably to “fix” our nation’s broken economy.

Hold the phone a minute.

Let’s ponder the question no one is asking: How does a government that is already a gadzillion dollars in debt “fix” the economy.

Think of this. If my business was a gadziillion dollars in debt, would you ask me for a loan. Would you ask me how to improve my financial situation. Would you allow me to “fix” things for you.

Not likely.

Yet, millions of Americans place their hopes in politicians and the Washington elite – most of whom have NEVER owned or operated a business – to ride to the rescue… to save the day…

Well, I got news for you. A band-aid on a cancerous tumor doesn’t make it go away. It may make you FEEL like things have changed – but your feelings may be dead wrong.

Yet, while all the finagling is going on in Washington to save our economy – there is a clandestine group of men and women who really don’t worry about which way the
economic winds blow. Why. Because no matter what – they are going to “find a way” to profit from it.

And these from the Rude Awakening:

First up, some thoughts from David Myhre reporting from, Stuart, FL…

Same message, different story. We MUST pass the Patriot Act NOW. Saddam has WMD – we MUST act NOW to protect America. The financial markets are falling – we MUST act NOW to save America. All I can say is, the town that heard the “WOLF !!” cry only took two fake calls to realize they were being conned. What about us and our “leaders” in DC ?? How many of these BS scares will it take to realize they’re blowing smoke again ? The Empire of George II falls back to its most successful ploy – act now or be destroyed. And anybody opposed is anti-American.

Answer me this, Hank and Ben – if Congress throws a couple trillion dollars after the stupid losses financial institutions have blown, will you GUARANTEE it will fix the problem ? Will you sign over your personal wealth to the US government to help pay for your plan’s failure ? The two most important questions are:

If we don’t accept your proposal, is a crash certain ?

Will this plan fix the problem and avert a crash ?

And therein lies the true question. Nobody that I know has said a crash is certain whether or not a “bailout plan” is carried out. Similarly, nobody I know of has certified that a “bailout” plan would fix the problem. It all boils down to credibility. And the administration of George II has none. Paulson in my book, who was head of Goldman Sachs during its massive increase of leverage, has none. And clearly, Bernanke’s opening of the Fed discount window has averted nothing and perhaps aggravated the situation.

Let the mismanaged financials fail and their assets get bought up by more ethical competitors. Let the fools who bought overpriced real estate using idiotic mortgage plans rent. Let the law of logical consequences solve this problem. Sure, some of Hank and Ben’s country club buddies may have to sell the house in the Hamptons, but hey, fair is fair. Bailouts aren’t.

In fact, it is not a slap in the face to people like me – it’s a right cross and a low blow by people who are in positions of trust who cannot be trusted. I worked hard, saved, invested wisely, never bought a new car, paid my bills and lived within my means. How dare you spoiled Wall Street brats tell me I should be responsible for scalawags such as you ? Millions of RESPONSIBLE Americans are NOT losing our homes to foreclosure because we bought homes we could afford. How dare you swindle us into paying for the irresponsible people who wrote loans to people who you KNEW couldn’t pay and the ignorant ones who bought more house than they could afford.

This plan in every aspect is UNAMERICAN. The FAIR way to solve this mess would be to sieze the assets of the offending financial institutions and use the proceeds to protect responsible Americans from the ill effects of the greedy financiers who caused this mess. The FAIR way to ensure it never happens again is to ban the officers and directors of the companies that created this mess from ever working in a financial company again.

But hey, socialists have never really cared what’s fair. Or Capitalists, for that matter. And former capitalists who want to socialize losses after pocketing profits couldn’t care less about the poor shmucks they con into paying for their irresponsible behavior.

I do not believe one word Paulson or Bernanke say. I believe a shakeout is the only thing that will scour the scum out of a largely dysfunctional financial sector that operates without ethics and is more casino gambling than responsible investing.

In 1930, the perps jumped out of windows. In 2008, the perps get a golden parachute. We’ve come a long way, baby, and it isn’t all for the better.

And this, from Marc Abramsky, a sympathetic Canadian…

Always interesting reading your eletter. Very informative with a nice tidbit of useful information daily.

I am Canadian and I agree strongly with your take on Paulson and the way in which he Fed is acting in bailing out their rich buddies.

I think people have long understood this double standard but never before has it been so blatantly waved in front of the public’s face. I simply can’t fathom how this debacle has been allowed to take place. That the clear minority should be able to exercise this appalling act without so much as a peep from the tax payer and general populace. Even here in Canada (where we are deemed very conservative compared to our southern North American’s) this would cause a minor revolution. Especially in Quebec. These greedy, self-serving, ego centric, morons, should be herded up and thrown in jail. Nothing less. This is a crime scene, no different than Enron or any other scandal where greedy executives have deliberately taken the public’s money.

In fact thieves might be better here, at least they are anonymous unseen faces until they are caught. These jokers are supposed to be leaders. The whole world watches now with complete disgust as liars, cheats, thieves and crooks are rewarded for their crimes.

What a sad place the USA has become. What was once a worldly icon of freedom, opportunity and integrity has become a sham. A place where white collar crime flourishes.

What are your thoughts?

Today’s comment is by Bob Bauman, JD, former U.S. Congressman and long-time Senior Writer and Legal Counsel for The Sovereign Society.

Dear A-Letter Reader,

Not far from America’s financial epicenter, universally known as “Wall Street,” is a huge, empty crater where the Twin Towers of the World Trade Center once stood.

Within weeks of the disaster that annihilated those once-glorious free market icons, fear served as the justification for a panicked U.S. Congress to enact the so-called PATRIOT Act.Without even seeing the text of the bill, the congressional herd mentality to “do something!” produced one of the greatest assaults on the American Constitution ever passed into law. Its odious impact on our liberties still remains today. And barring the miracle of a new Congress emerging with both courage and common sense, it will continue on for years to come.

And now we find ourselves 7 Septembers after 9-11, in a different yet all too familiar national media “panic.”

“The experts” are telling us that the Congress must act immediately to bailout Wall Street, adding nearly a trillion dollars to the national debt. (The existing public debt alone figures out to be US$31,600 for every man, women and child in America, and this new demand will add another estimated US$2,300 for every American).

But wouldn’t hindsight prompt us to think before acting this time around?

Welfare on Wall Street

I am not going to review here the immediate and past history that TV talking heads recite ad nauseum that leads to a media-induced national migraine. Instead, let’s go back to the beginning.

Wall Street’s name is a direct reference to a defensive wall that Dutch settlers erected on the southern tip of Manhattan Island in the 17th century. The area didn’t become famous as America’s financial center until the end of the 18th century, when 24 of America’s most prominent brokers signed an agreement that created the New York Stock Exchange.

But now, in my humble opinion, it is time to resurrect that wall, at least figuratively, and certainly politically and legislatively – in order to defend America against Wall Street.

The garrulous Senator from Delaware, Joe (The Mouth) Biden made the news last week in saying that paying greater taxes was wealthy Americans’ “patriotic duty.” But even he could not foresee the dimensions of what would come next…

Yes, the “panic” came quickly. Lehman Brothers Holdings Inc. filed for bankruptcy protection. The government took control of AIG. Liquidity froze up. They’re saying this could be the most dire market malfunction since the crashes of 1987 – or even 1929.

But the crash was not a surprise to everyone. Here at The Sovereign Society we have long been warning you individually and collectively for quite some time. We told you that the House of Cards was going to collapse – it was just a matter of when. And we have been offering sound investment alternatives to avoid the disaster.

What Lies Beyond the “End of an Empire” Closeout Sale?

“The financial market crisis of 2007 may be remembered as the beginning of the nationalization of a large part of the financial system.” So wrote Floyd Norris in The New York Times. (Dec. 14: A Worrisome New Wrinkle in Bailouts).

Norris also noted that it was foreign governments’ billion dollar “sovereign wealth funds” that came to the rescue last year: “It took a [Singapore] government bailout to shore up UBS…it was Citigroup that got [Abu Dhabi] government aid to help recover from its bad investments.”

Now we are told that the United States government, headed by a Republican president, must create its own US$700 billion sovereign wealth fund (or sovereign debt fund) to rescue us once again. This fund must buy up an untold amount of investment vehicles gone bad – home and other real estate mortgages, sub-prime derivatives, exotic instruments few understand and no one seems able to evaluate – except by calling it “junk.”

And all this, only weeks after Congress adopted a US$300 billion housing bill that was supposed to solve the crisis!

If It Looks Like a Duck and It Quacks Like a Duck…

Bank bailouts may or may not be necessary to avoid a major economic recession, but government owning private businesses and banks smacks of fascism.

Yes, dear readers, if you enjoy reality TV shows, you’ll love the reality of the same kind economic fascism once promoted by Mussolini, Hitler and Juan Peron, among other economic crackpots. Hugo Chavez, anyone?

America, welcome to “backdoor fascism.”

Added to all their other horrors, these fascist leaders put their national economies under government control without outright confiscating the means of production.

Fascist governments nationalized key industries – especially banks – managed currencies and made massive state investments. True, fascist economies were based on private property and private initiative. But these were contingent upon agreement with and service to the state.

The industrial and business aristocracy of a fascist nation often put the government leaders into power. In doing so, they created a mutually beneficial business/government relationship and power elite.

Have you checked how much Wall Street has donated to both Democrats and Republicans in Congress who are now writing the new emergency bailout laws?

Fascist regimes were governed by groups of friends and associates who appointed each other to government positions. They then used power and authority to protect their friends from accountability. Fascist governments instituted state-regulated allocation of resources, especially in the financial sectors.

“Oh, but that can’t happen here,” you protest.

Hey, folks, just look around. Isn’t any of this beginning to appear sickeningly familiar? What is past is prologue!

At Least Someone Out There is Making Sense

Newt Gingrich is one of the few urging Congress to step on the brakes in this US$700 billion bailout plan,

In National Review online, former speaker of the U.S. House of Representatives, Gingrich writes: “Congress was designed by the Founding Fathers to move slowly, precisely to avoid the sudden panic of a one-week solution that becomes a 20-year mess.”

In an NPR radio interview, Gingrich said he thinks the bailout plan is “just wrong,” and that “it’s likely to fail, and it’s likely to make the situation worse over time.”

Will America ever Wake Up and Smell the Totalitarianism?

Wouldn’t it be unusual – even heroic – if the two current candidates for the U.S. presidency stopped their irrelevant hollering at each other? If they dropped their absurd daily nostrums that even they know will never become law?

Isn’t it about time that they cancel their campaign whistle stops and return to the U.S. Senate Chamber, (where, after all, they are both still members), and participated in a real debate? Perhaps about where America and the national economy truly should be headed – and what they would do about it?

If ever there has been a point in modern times when true leadership was needed, that time is now.

BOB BAUMAN, Legal Counsel

- Breaking News -

INSIGHT BROADBAND DENIES ACCESS TO WEBSITES

September 8, 2008 9:10 PM (Cincinnati, Ohio) Insight Communications, a relatively small cable company that services parts of Kentucky, Southern Indiana, and Ohio, has unilaterally decided to deny its Internet cable service customers access to certain websites.

Our investigation has determined that Milktoast.info is one such website. This website specializes in educating credit card holders in the legal art of dealing with credit card banks, collection agencies, and collection attorneys. It teaches the ultimate defense: how to beat the banks in court.

Our conversation with an Insight customer service representative provided no reason for this draconian measure by Insight Broadband. Just a lot of evasive responses.

Based on the lack of response by the customer service representative to certain questions it does appear that outside pressure has been brought against the executives of the corporation to initiate this ban. By whom? We weren’t able to get a definitive answer.

However, based on the content of the website and its obvious success in teaching people how to eliminate their credit card debt, it is conceivable that the pressure was brought by an organized band of collection attorneys and their clients, the banks. This same group of profiteers has already lobbied Congress to change the credit card agreement laws to their benefit. The bill is currently before the House.

Evidently these profiteers aren’t willing to wait for Congress to act. They’ve found a quicker way to defeat their opponents. It may be cowardly; but, it is effective without bringing attention to them or their goals.

What happens next? Only time will tell.

We’ll keep you posted as the story unfolds.

- Update -

September 9, 2008 9:10 AM (Cincinnati, Ohio) A miracle or a coincidence?

But first, a little background. According to the owner of Milktoast.info his website is hosted in Malaysia to keep the website safe from the Gestapo tactics of the U.S. banking industry. These financial thugs have a tendency to use intimidation against U.S. hosting companies when they find a website they don’t like. The threat of withdrawing credit and calling loans is much quicker and more effective than having to prove your case in a court of law. Especially when your arguments have no basis in law.

So, before we wrote our original article we checked dozens of websites hosted in Malaysia to see if we could find any non-bank related websites in Malaysia that were banned. We couldn’t.

This morning we revisited Milktoast.info. It was accessible.

According to the owner, within two hours of his posting our original article to his website Milktoast.info became accessible. Just as quietly and suddenly as it was banned.

A miracle of a free press or a coincidence?

We don’t know. But, if you need this kind of help with your credit card debt we would strongly suggest you take advantage of this website while you still have the opportunity. It seems that information designed to help people has had a strange way of suddenly disappearing over the past several years.

Go figure.

Dear Reader,

Over the years as I’ve gotten older I’ve learned two things. One, in the Wonderful World of Republicans and Democrats, things usually aren’t as they appear. And two, because of lesson number one, you need to continually ask why, over and over again. If you do, you’ll eventually come close to the truth.

What does this have to do with debt consolidation companies?

First, let’s define what we mean by �debt consolidation company.�

When I hear the word �consolidate� I think of a company that takes all my debts, adds them up, and loans me the money to pay them all off. Then I just make one small payment to the consolidation company. They �consolidate� a bunch of small debts into one big, easy to manage debt.

These types of companies are few and far between.

Most of todays �debt consolidation companies� do nothing more than negotiate, on your behalf, with the banks. They get the banks to settle for a lesser amount at a lower rate of interest. Then, when you add up all your debts and all your payments, its an amount you can afford. And, to make sure things go according to plan, you make your payments to the consolidation company and they in turn pay the banks. The whole purpose is to get your debts paid off in 2 to 5 years.

Sounds like a deal, doesn’t it?

This is where things start to get confusing.

If you’ve ever read you credit card agreement it probably has a �default� or �universal default� clause.

With the �default� clause, if you’re late with a few payments over a certain period of time, with your credit card bank, they’ll raise your interest rate to a staggering 25 � 40%. With the �universal default� clause, if you miss any type to payment, to anyone, (that includes utilities, rent, or bouncing a check) during a certain period of time, they’ll raise your interest rate to the same staggering 25 � 40%.

Which brings us to several �why� questions.

You’re late on a few payments. The bank raises your interest rate to penalize you. Now, you can’t afford to make even the minimum payments. So, you go and pay some of your hard earned money to a consolidation/negotiation company to convince the bank to lower your interest rate and the balance due. According to these companies ads, the banks almost always agree.

Why? And why?

If the banks are raising your rates to penalize you, why would they agree to lower the rates for a third party consolidation/negotiation company?

And, why won’t they do this for you directly? Better yet, when you miss a few payments why doesn’t the bank send you a letter telling you not to worry, they’re going to lower your rates, forgive some of the debt, and reduce your payments until you get out of your financial pickle?

Could it be that there is something else the bank is trying to do when you get into a financial squeeze?

Are the banks raising the rates to force you into needing the services of one of these consolidation/negotiation companies? And, if so, what are they trying to get you to do?

Here’s where I really start to wonder.

The ads for these consolidation/negotiation companies brag that they can get your debt reduced up to 70%. Which means you will still owe 30� on the dollar. According to a recent article in the Boston Globe, collection companies are buying delinquent accounts for as little as 2.5� on the dollar. If these consolidation/negotiation companies are so good at what they do, why can’t they at least get the same deal? In fact, since they’re being paid to represent you, why can’t they get a better deal? Like $0.00?

Jim Bullock

Dear Reader,

This week in the news:

�Red Cross seeks relief donations

Orlando Business Journal, Wednesday, June 18, 2008 – 9:22 AM EDT

The American Red Cross of Central Florida is seeking donations for disaster relief efforts for those parts of the U.S. experiencing severe weather.

The organization has spent nearly $15 million responding to recent disasters, such as tornadoes in Indiana and floods in the Midwest.

After funding 32 disasters across the U.S., the organization’s Red Cross Disaster Relief fund is expected to reach its limits. Rising travel costs, such as fuel, have impacted the organization’s budget, say officials.�

Yet, Ben Bernanke was able to find another $75 Billion of your future income to lend to his banker friends.

Seems the people who control the money in this country can always find ways to bailout their greedy little friends who have created their own problems but can find no plausible reason to help people who are suffering from acts of nature, things they have no control over.

The priorities of the Empire, I guess.

How to Save Yourself from the Horror of Your Bank Going Belly Up

Dear Reader,

Imagine waking up on a sunny Saturday morning to find you can’t use your debit card to buy groceries or pay for gas any longer? You can’t withdraw a single dollar from the ATM. And your bank froze your credit cards.

Then you discover that every check you wrote in the past week has bounced. And, you receive a call saying that your retirement assets are frozen. The kicker is that you had over US$1 million dollars in your account.

You try to call your bank for answers, but they won’t help you.

I know this story sounds like I’ve pulled it right out of the Great Depression. I’ve got news for you…this story is very real. It all happened last month to a US$2.1 BILLION bank in a little community in Bentonville, Arkansas.

How a Bank “Suddenly” Goes Under in the 21st Century

It was a very organized attack. On May 9th, the accountants snuck in the back door that Friday night after 5:00pm once the bank’s doors had closed. Little did anyone know the doors were closing for good…

And under the cover of darkness, over a hundred FDIC accountants began to systematically dismantle ANB financial headquarters – the venerable US$2.1 Billion institution that had been in business just hours before.

In short, FDIC officials were there to pick up the pieces because ANB was about to become the third bank to FAIL here in the United States in just the last six months. The fourth-largest bank in Arkansas was about to become yet another sub-prime casualty that choked on their own bad loans and investments.

The unlucky customers of ANB received nothing more than a letter that stated nothing of the bank failure, but rather introduced the “new” bank – Pulaski Bank.

Yet, I am sure most customers figured out their bank had gone south long before the formal letter arrived. As of 5:01 PM on May 9th, every single account at ANB was frozen. Money market accounts to trust assets to basic checking accounts…

What FDIC Insurance Really Means If Your Bank Goes Under

When you hear your account is “FDIC insured,” do you really know what it means? In short, it means the Federal Deposit Insurance Corp. will reimburse you for up to US$100,000 for any one account you hold in your name.

If you have a joint account, then both account holders are insured up to US$100,000. You also can secure US$100,000 for each beneficiary in certain accounts (payable on death). (For full FDIC rules see FDIC’s Guide to Deposit Insurance Coverage.)

Does this insurance help? Absolutely. But when you have an account worth more than US$100,000…well, that’s how you can lose money if your bank goes under.

Also, these days most respectable businesses make well over US$100,000 a year, so that limit is fairly easy to reach. And when accountants poured over ANB’s books, they discovered 647 accounts that exceeded that limit. That equaled US$39.2 million in uninsured funds.

FDIC representatives, who I believe must hate their jobs on a regular basis, had to call these unfortunate account holders and tell them what they lost. One ANB client lost US$1.4 million. Overnight. With no warning. And as for the rest…well historically, uninsured deposits recoup 65 cents on the dollar. Plus, it can take years to get your money back.

A shocked ANB client said to me: “It’s like [your money] doesn’t belong to you anymore…it’s theirs.”

Make Sure this Doesn’t Happen to You

As we’ve often said over the last 10 years in this business, you can protect yourself from such massive faults in the U.S. banking system. And one of the easiest ways to do that is to spread out your wealth across several accounts – just in case a bank goes insolvent like ANB did.

Another valuable option is to diversify by moving a portion of your wealth offshore. By banking offshore, you gain an extra layer of protection because historically, offshore private banks have a higher liquidity than domestic banks. And in places like Switzerland and Austria, banks have stayed solvent for hundreds of years.

Jack Pugsley, a hard money advocate and our Chairman, has a few suggestions about how to protect yourself from the next banking calamity including:

1. Check out your bank’s credit rating. Check out the collateral backing up the loan. In the case of banks, you can do this by getting regular credit reports on any U.S. bank from Veribanc.

2. Understand the rules, so you know what you’re getting into. You can check out FDIC rules to find out what types of accounts are covered and how much. Click here for the rules.

3. If you decide to bank offshore, treat your offshore banker like a domestic banker. Check their credit rating and collateral. Sound foreign banks also protect against the possibility of the U.S. government declaring a bank holiday, or freezing bank deposits, as Roosevelt did in 1933. It could happen if economic conditions get really bad. Other countries (like Argentina) have done this more recently. So choose the strongest currencies and countries.

4. Above all, keep in mind that bank deposits are loans in a currency. Right now, U.S. banks are paying less than the inflation rate for deposits, and the interest is taxable. So depositors are losing purchasing power, and if price inflation heats up, which it will, the losses could be substantial.

5. Diversify, diversify, diversify…between banks, between currencies, between countries, and between assets (loans, equities, tangibles).

Above all, look at a bank deposit for what it is, a loan to the bank. Treat the banker like you would treat anyone who asks you for a loan. You want to know whether the borrower will be able to repay you if he gets into trouble.

You never want to wake up one day and find yourself without a bank. But if it happens, a few precautions can help you protect what’s yours.

ERIKA NOLAN, Managing Director

Here’s an article I found at: �HowToGetRidofStuff

It has�some good information I thought our�readers might�find interesting.

You also had good credit. But that�s all gone now. Now you�re divorced and reduced to wearing a blue vest and advising Wal-Mart customers to have a nice day. Your only constant companion is debt. And lots of it. Want to get rid of it? Maybe you can.

If you�ve gone into debt, don�t take it as a personal failing. Today, given cycles of unemployment and chronic under-employment, it is more and more common for people to fall into debt. It hasn�t helped that the past few generations have determined it�s necessary to own a new car, a wealth of entertainment gadgets, the latest fashions, and generally live pretty high on the hog � even though they can only periodically afford it, if ever.

Debt: It�s the American Way!

Our leadership has provided no bright, shining beacon in this regard, either. The nation has run up such colossal debt that, in seven more generations at the rate we�re spending, all of the national budget will be going to pay off interest on the debt.

Even though it is likely that your plight is, at best, only partly due to your financial habits, the first thing to do is create a budget. How much do you presently have coming in? How much is going out? What are the sources of your debt? Where can expenses be cut? Can the debt eventually be paid down out of your income?

While you�re studying your budget, it would probably be a good idea to cut up those credit cards. If you need something for making necessary purchases over the internet, get a debit card which immediately deducts spending from your bank account.

Can you reduce your monthly credit payments? Call your creditors and see whether you can work out some deals. For the most part, they would rather get a little something from you than get nothing. This is equally true for secured debts as unsecured debts. Call you mortgage holder to avoid foreclosure. If the lender is unwilling to work with you and the loan in insured (e.g., by FHA or a private carrier), call the insurer.

Bicycles Are Cheap and Provide Good Exercise

Should you sell your car? It�s a big expense, but if you commute to work, haul kids around, or use it to get groceries, you�ve got to keep a car. Not necessarily that car, of course. You could sell the car and buy a cheaper used car. Your monthly cost might go down, but you will certainly lose a lot of money on the sale because of new-car depreciation. You�ll have to think that one over along with the idea of maybe selling your house for something cheaper.

If you have difficulty in working with figures and coming up with a budget, consider using a credit counseling agency. Be sure, however, to ask ahead about their fees. Some are quite expensive, and you don�t want to take on any more debt. The agency may recommend a debt management plan through which creditors may lower interest rates or eliminate fees in return for the guarantee of a monthly payment. Repayment terms may be stretched out to four years or more.

Should you have sufficient equity in your home, and the value of it has increased since your purchase, you might re-finance it for a higher amount and use the overage to pay down your other debts. Similarly, you might obtain a second mortgage on the home to apply the proceeds to paying off the debt. Be forewarned it is risky business – you jeopardize your home if you have no intention of keeping your spending under control. Your goal should be to have no home mortgage by the time you retire.

Bankruptcy: a Whole New Ball Game

Declaring bankruptcy under Chapter 7 of the Bankruptcy Act used to allow you to wipe out your unsecured debts and get a new start every seven years. (Creditors are allowed to repossess their property or foreclose your mortgage and evict you; federal taxes owned can never be written off.) Spurred on by the credit card companies, who were, naturally enough, not too happy about that state of things, Congress changed the law in 2005. Now the period before you can again declare bankruptcy under Chapter 7 has been extended to eight years. (It can be as little as two years under Chapter 13.) You must go through a government-approved program of credit counseling, and you must now meet a means test; if your family income is over the median for a given state (less allowable personal expenses), you may not file: allowable income for a family of two ranges from $38,143 in Mississippi to a high of $62,953 in Alaska.

Debtors are encouraged to file Chapter 13 bankruptcy rather than Chapter 7. Under this procedure, the court sets up a payment schedule whereby the debtor has up to 48 months to pay what he or she is able � in the court�s opinion � to pay off. So long as the payments are met, the remaining debts are discharged at the end of the court-specified period.

Two alternatives to bankruptcy, which will negatively affect your credit rating for years, are debt consolidation and debt negotiation. Both are handled by private companies for a fee. When you sign up with a debt consolidation company you are offered a lower overall monthly payment based on a lower interest rate the company has arranged with creditors. Generally, there will be at least one credit card company among the creditors, and you will be blocked from using that card during the pay-back period.

Debt negotiation, sometimes referred to as debt settlement, is for those who cannot afford the minimum payments of debt consolidation. The company settles your debts with your creditors, paying them a smaller percentage of the amount owed. You then set up a payment schedule with the debt negotiation company. The company generally requires that the creditor state for credit reporting purposes that your debt was paid-in-full.

Debt Consolidation, Renegotiation � Step Carefully

This sounds ideal, doesn�t it? It�s not. The Federal Trade Commission recently filed a complaint against a number of such companies, reporting that the defendants often �would not begin negotiating a consumer�s debts for six months or longer, and that creditors� collection efforts not only do not stop, but often become more aggressive.� Consumer accounts, unknown to them, became delinquent, with late fees, penalties, and interest accruing on their debt. Creditors were suing to collect on debts, sometimes garnishing wages. After paying these companies to negotiate payments, the debtors were not informed when some companies refused to settle a debt. When some debts were negotiated, the creditor reported �settled for less than full amount� to credit reporting agencies rather than �paid-in-full.� Before using a credit negotiator or debt consolidator, the FTC advises that you check the company out with your state�s Attorney General�s office.

Dear Reader,

As you may remember we put in a Country Hotline Service here at the Daily Reckoning headquarters. We offered to give advice to central bankers and heads of state � for free.

Well, we�re still waiting for the phone to ring. But if the phone ever rings, we�re ready. We can imagine the call:

Ben: �Gosh Bill, I�m in a bit of a jamb. I�ve got rising consumer prices on the one side…and a falling housing market on the other. I should raise rates to head off inflation, on the one hand, but if I do that, I risk sending the economy into a recession. Then, I�ll get blamed for everything. The Republicans will lose the White House � and blame me, of course. The economy will sink � just like Japan in the �90s � and I�ll get blamed for that too. It isn�t fair…�

DR : �Well…you…

Ben: �Wait…it�s actually worse that I made it sound. Because either way I go, I�m screwed. If I cut rates, the dollar will go down and the �crude oil cowboys� are going to push the price up to $200 � and the whole world economy could go into some kind of crisis. If I raise rates, on the other hand, I�m almost certainly dooming all those marginal homeowners to bankruptcy. They all live on credit. And if the cost of credit goes up…they�re going to be squeezed hard. What�s really happening is that we�re on the downside of the credit cycle. So the cost of credit is going up…no matter what I do.

�And don�t even think about mentioning Paul Volcker. I�m sick of hearing his name. Let�s face it, he wasn�t a genius; he was just lucky to be on the right side of the credit cycle. Lending rates peaked out early in his term at the Fed…he could coast the rest of the way. I�ve got the opposite situation. Lending rates are bottoming out…just as I get started. It�s going to be uphill from here on…and I�m left holding the bag.

�Did you see what happened in the bond market recently? The 10-year note yield went over 4%…and it didn�t come back down until speculators started to bet on a rate increase.

�What can I do? Sit tight? But if I do nothing…and sit pat…I�ll get even more criticism. People will forgive you if you do the wrong thing; but they�ll never forgive you for doing nothing. Doing nothing is not an option.�

DR : �Well…what we�re seeing is pretty much what you could have expected, isn�t it? Isn�t this what happens when…�

Ben: �Look…I don�t need any of your lectures…I just want to know what lever to pull on. The one marked �fight inflation� or the one marked �fight recession�?�

DR : �Sorry, Benny…it�s not that easy.�

Ben: �What do you mean? There are only two levers. I just wan to know which one to pull.�

DR : �It doesn�t really matter, does it?�

Ben: �What do you mean by that?�

DR : �Just as you said; you�re in a jamb. If you raise rates, while house prices are falling and GDP is nearly flat, you�re almost surely going to have a recession. But if you cut rates, oil is going up…inflation will rise…bonds will fall, and interest rates will go up anyway. Either way, the economy goes into a slump.�

Ben: �Yeah…so what do I do?�

DR : �Well…you�ve got to think about it in a whole different way. People made mistakes. They built too many houses. They paid too much for those CDOs and MBSs and all the rest of it. They bought businesses for more than they were worth. You can�t do anything about those bad mistakes…except help people correct them as soon as possible.

�You�re not doing any favors by offering more credit to a guy who is too deep in debt. And you�re not doing anything good for an economy that is living on borrowed time and borrowed money. What the whole system really needs is a correction. Why not give it one? Raise rates � a lot. That�ll send a message. That�s what Vol….never mind. Give people a reason to save again. And give the speculators a good spanking. Liquidate housing. Liquidate the banks. Liquidate the farmers. Liquidate the stock market. Liquidate the consumer. Liquidate the whole damned bunch. And while you�re at it, go on TV and tell the public the truth; that modern central banking is as fraudulent as Freudianism…and that from now on, you won�t be putting out any more funny money.

Ben: �Hold on…you know I can�t do that…

DR : �Then get out while the getting is good. Maybe you could fake a heart attack or something, and announce your retirement…that would give you some public sympathy…while you leave the next guy holding the bag.�

The phone is still silent.

Until tomorrow,

Bill Bonner
The Daily Reckoning